Note 3 - Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

3.  Fair Value of Financial Instruments

The Company measures and records warrant liabilities at fair value in the accompanying financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:

Level 1 - Observable inputs for identical assets or liabilities such as quoted prices in active markets;

Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 - Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.

The following tables represent the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

	As of June 30, 2013
	Level 1		Level 2		Level 3		Total
Liabilities:
Compensatory stock options not yet issued (1)	$	-	$	-	$	63,838	$	63,838
Accrued warrant liability		-		-		4,757,770		4,757,770
Total liabilities	$	-	$	-	$	4,821,608	$	4,821,608

	As of December 31, 2012
	Level 1		Level 2		Level 3		Total
Liabilities:
Accrued warrant liability	$	-	$	-	$	4,105,659	$	4,105,659
Total liabilities	$	-	$	-	$	4,105,659	$	4,105,659

(1) Included in accrued expenses in the accompanying consolidated balance sheets.

The Company uses the Black-Scholes model to measure the accrued warrant liability and its accrual for compensatory stock options not yet issued. The following are the assumptions used to measure the accrued warrant liability at June 30, 2013 and December 31, 2012, which were determined in a manner consistent with that described for grants of options to purchase common stock as set forth in Note 2:

	June 30, 2013			December 31, 2012
Stock Price	$1.58			$1.33
Exercise Price	$1.60	-	5.00	$1.60	-	5.00
Term in years	0.84	-	2.16	1.09	-	2.41
Volatility	68.47	-	87.18%	82.75	-	95.91%
Annual rate of quarterly dividends	0%			0%
Discount rate- bond equivalent yield	.13	-	.40%	.17	-	.29%

The following are the assumptions used to measure the compensatory stock options not yet issued at June 30, 2013:

	June 30, 2013
Stock price	$	1.58
Term in years		5
Volatility		80.80	%
Annual rate of quarterly dividends		0	%
Discount rate - bond equivalent yield		1.41	%

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the six months ended June 30, 2013 and 2012: 

	Three months ended June 30, 2013					Six months ended June 30, 2013
	Accrued Warrant Liability			Compensatory Stock Options Not Yet Issued		Accrued Warrant Liability		Compensatory Stock Options Not Yet Issued
Beginning balance	$	7,553,382		$	63,641	$	4,105,659	$	-
Total (gains) or losses, realized and unrealized, included in earnings (1)		(2,795,612	)		-		652,111		-
Estimates and other changes in fair value (2)		-			197		-		63,838
Settlements		-			-		-		-
Balance, June 30, 2013	$	4,757,770		$	63,838	$	4,757,770	$	63,838

	Three months ended June 30, 2012					Six months ended June 30, 2012
	Accrued Warrant Liability			Compensatory Stock Options Not Yet Issued		Accrued Warrant Liability			Compensatory Stock Options Not Yet Issued
Beginning balance	$	5,566,203		$	85,000	$	7,285,959		$	378,750
Total (gains) or losses, realized and unrealized, included in earnings (1)		(2,543,270	)		-		(4,263,026	)		51,823
Estimates and other changes in fair value (2)		-			29,617		-			114,617
Settlements		-			-		-			(430,573	)
Balance, June 30, 2012	$	3,022,933		$	114,617	$	3,022,933		$	114,617

(1) Unrealized gains or losses related to the accrued warrant liability were included as change in value of accrued warrant liability. There were no realized gains or losses for the three and six month periods ended June 30, 2013 and 2012.

(2) Expenses recorded for compensatory stock options not yet issued are included in research & development expense and general and administrative expense.

As of June 30, 2013 and December 31, 2012, the Company had no assets or liabilities that were measured at fair value on a nonrecurring basis.

The Company considers the accrued warrant liability and compensatory stock options not yet issued to be Level 3 because some of the inputs into the measurements are neither directly or indirectly observable. Both the accrued warrant liability and compensatory stock options not yet issued use management’s estimate for the expected term, which is based on the safe harbor method as historical exercise information over the term of each security is not readily available. Additionally, the number of compensatory options awarded involves an estimate of management’s performance in relation to the targets set forth in the Company's Executive Compensation Plan. The following table summarizes the unobservable inputs into the fair value measurements:

	June 30, 2013
Description	Fair Value		Valuation Technique	Unobservable Input	Estimate/ Range
Compensatory stock options not yet issued	$	63,838	Black-scholes pricing model	Expected term	5
				Quantity of options	62,500
Accrued warrant liability		4,757,770	Black-scholes pricing model	Expected term	0.84	-	2.16
	$	4,821,608

Management believes the value of both the accrued warrant liability and compensatory stock options is more sensitive to a change in the Company’s stock price at the end of the respective reporting period as opposed to a change in one of the unobservable inputs described above.

The carrying amounts of the Company’s short-term financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable and accounts payable, approximate their fair values due to their short maturities.